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    Question

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    A 796.4 Correct Answer Incorrect Answer
    B 509.9 Correct Answer Incorrect Answer
    C 432.9 Correct Answer Incorrect Answer
    D 679.1 Correct Answer Incorrect Answer

    Solution

    The new equilibrium income is Y*=1115/1.4=796.4 The change in equilibrium income is less than the shift of the IS curve. This is because of the crowding out effect of investment: rising interest rate reduces the investment and hence reduces the aggregate income.

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